Encana Corp.’s largest Canadian investor has made no secret of its disdain for the company’s plan to Americanize. Now it has released a set of numbers it says show why it believes the idea is flawed.
Letko, Brosseau & Associates Inc., which holds about 4 per cent of Encana’s stock, vows to vote against the oil and gas company’s plan to move its corporate domicile to the United States, home of chief executive Doug Suttles. The company touts the move as a way to attract more investment from U.S. index funds.
Peter Letko, senior vice-president of Montreal-based Letko, Brosseau & Associates Inc. said his estimates show that the potential loss of Canadian investment could actually mean a bigger impact on the shareholder base than the potential increase in the U.S. holdings. That raises questions about governance, he said in an interview Friday.
“The board has a fiduciary responsibility to all shareholders, and in the material they provided to support the argument for moving, prominent in it was [that] they didn’t mind losing at least 100 million shares held by Canadian index funds,” Mr. Letko said. “It’s almost as if these are sort of faceless owners. To lose these, it doesn’t seem to bother them.”
He said the numbers may actually be higher. In addition to the 100 million shares the firm estimates will be sold by Canadian passive funds that will have to divest when Encana is no longer included in a Canadian stock index, he said another 86 million could be unloaded by global index funds.
In addition, Canadian institutions such as pension funds hold about 155 million Encana shares currently, and domestic investors who qualify for favourable tax treatment for the dividends own another 100 million, he said, and their continued ownership following the shift is not guaranteed either.
Meanwhile, according to Encana’s documents, U.S. index funds could accumulate about 250 million shares.
The risk, Mr. Letko said, is that shares of Encana – sorry, Ovintiv, as the new company would be known – may not qualify for all the indexes it is aiming for, in the time frame hoped. The key one is the S&P 400, and it could be a year before the shares are confirmed to be included. In the meantime, sales by Canadian funds will be in full swing.
Encana declined to comment on his estimates, but Mr. Suttles had previously taken Mr. Letko to task, saying the company believes that only Canadian index funds will be forced to sell, and the stock will remain listed in Toronto and New York.
The corporate move from Calgary is the centrepiece of an initiative that also includes a reverse stock split. Encana contends it stands to gain more than US$1-billion of investment by large index funds and other passive investments as it concentrates on a market that is 15 times the size of Canada’s.
Letko, Brosseau is not alone in questioning the move. Bank of Nova Scotia director of global equity trading Andrew Moffatt said he believes Encana would boost its passive holdings funds by 5 per cent of its float, rather than the company’s own estimate of 20 per cent, which is based on shareholdings of selected U.S. peers. He also estimated that the company would lose 15 per cent of its Canadian fund holdings, rather than Encana’s estimate of 7 per cent.
“We estimate [Encana’s] decision to redomicile (to the U.S.) will increase its exposure to index funds (over time) but will only have a marginal impact (if any) in the short-term,” Mr. Moffatt wrote in a recent report. “Furthermore, Canadian fundamental accounts and existing retail holders could accelerate Canadian selling before the U.S. index buying even starts.”
The board’s focus, Mr. Letko says, should be on insisting the company’s financial results improve after last year’s costly takeover of Oklahoma oil producer Newfield Exploration Co., rather than gambling with where investors are based.
“The company has had problems over the past year, and it’s stock price is down a hell of a lot. It has nothing to do with its shareholder base and has everything to do with the fact that they did a deal and issued shares and the deal was not warmly received,” he said.
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